Originally Posted by The Rev

And that is the interesting aspect to the whole affair. Money in circulation has increased dramatically over the last year or so, but not by the amount that the monetary base has (over $1Trillion). But like you say, all of that is sitting pretty in the Fed, covering banks in case they face insolvency. The theory is, as the economy strengthens, the Fed will mop this cash back up, and it will never hit the street. On the other hand, once the banks are back on more solid ground, the meager .25% interest the Fed is paying them to hold those reserves may not seem like enough, and they'll want to start lending. If THAT happens, we are fucked like an unconscious freshman in a room full of drunk frat boys. Inflation will go hog wild, and there will be so many bubbles that the economy will look like a jacuzzi.

Of course, even Krugman and Bernanke know that this will happen, so the interesting thing is, what happens if the money gets mopped up? Are there effects from generating all this dough no one has thought of. Also, CAN they mop it up? The fed reduces funds by selling off assets, but everything they bought to run up the base is so toxic that there's no way anyone will want to buy it. Maybe they can sell off treasuries instead, but if inflation is looming in the minds of buyers, they might not be able to do that either.

Either way, this whole event will be one for the econ textbooks.



The Rev